Q. We are funding a 529 plan every month for our daughter, who is 11. We will be retired and just beginning to collect Social Security around the time she heads off to college. We have other significant assets including investments, IRAs and annuities. A friend recently said our daughter’s 529 account may prevent her from being eligible for financial aid. He suggested that a life insurance policy with a cash value option may be a better route. Please share your thoughts.
— Mom and Dad

A. There are several items at play here, including ownership of assets.

The first item you should look at is your Expected Family Contribution, which is how much the school expects you to pay. A quick Google search will lead you to several free online calculators to help.

The main factors affecting the EFC are the parent’s adjusted gross income, the parents’ non-retirement assets, the student’s total income and the student’s assets, said Mark Ukrainskyj of Covenant Asset Management in Chester.

The fact that you’re planning to retire before your daughter goes to college will probably lower your AGI, he said, therefore lowering the amount you’re expected to contribute to college bills. This could be anywhere from nothing to 25 percent — or more if your AGI is more than $100,000.

"The EFC expects you to contribute approximately 5.6 percent of the parents’ non-retirement assets," he said. "This includes the 529 plans, but not cash value life insurance."

Dependent students are expected to contribute approximately 50 percent of their income over $4,000 and between 20 and 25 percent of their assets — UGMAs and UTMAs.

"So a lot will depend on the parent’s income at the time and also how much they have in non-retirement assets," Ukrainskyj said. "From the point of college funding, the worst thing they can do is put the money in the child’s account."

Both 529 plans and cash value life insurance grow tax-free, he said. Funds in the 529 plan can be pulled out tax-free only to pay qualified education expenses. Withdrawals from the cash value can be used for any purpose.

"However, this should be done as a loan so as not to increase AGI and thus your EFC," he said. "The loan will reduce the death benefit, though."

How assets are counted for financial aid consideration depends on who owns them. So the ownership of the asset will determine what percentage of that asset is counted toward the EFC.

Brian Power, a certified financial planner with Gateway Advisory Group in Westfield, offered this example:

Let’s say there’s $10,000 in a 529 account owned by you, with your child as the beneficiary, and there’s another $10,000 in an UGMA account. From the UGMA, $2,000 would be an expected contribution from your child because 20 percent of the child’s assets are considered for college, while only $560 of the 529 account, assuming it’s owned by you, would be the expected contribution.

"If the decision was solely based on reducing assessable assets to qualify for more financial aid, than the cash value life insurance would win hands down," Power said. "But parents need to weigh the assessibility of the asset with the flexibility, complexity, risk, tax efficiency, costs and expected rates of return of the strategy."

Power said you should also keep in mind that positioning your assets to try to qualify for financial aid may be smart, but most financial aid is given as loans to the student that must ultimately be paid back.